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June 11, 2012

Spain Accepts Bailout

Italy now in focus; Greece prepares for election amid power grid woes

Spain accepted a bailout Saturday for its financial sector, and Italy stepped up into the spotlight over concerns that it may be the next country to request aid. Greece, meanwhile, prepared for its next round of elections amid struggles to keep the power flowing during tourist season as it ran out of money.

Reuters reported Monday that despite Spain’s efforts to resolve its banking crisis on its own, on Saturday the country officially requested aid to keep its banks functioning. Economy Minister Luis de Guindos said in a statement, "The Spanish government declares its intention to request European financing for the recapitalization of the Spanish banks that need it."

However, Madrid did not specify how much money it would need at the time of the request; it is awaiting the results of reports by two consultancies, Oliver Wyman and Roland Berger, to determine the final total. The reports are due some time before June 21; the eurozone had hoped to resolve the issue before Greek elections scheduled for June 17.

A sometimes heated conference call about the rescue among the 17 nations of the eurozone lasted some 2½ hours, but in the end resulted in a commitment to deliver as much as 100 billion euros ($125 billion) to support Spain’s financial sector, with the understanding that the International Monetary Fund (IMF) would not be contributing funds to the effort.

Instead, the money will come from either the temporary rescue fund of the eurozone, the European Financial Stability Facility (EFSF), or the permanent European Stability Mechanism (ESM) which kicks in in July. Spain wanted IMF intervention kept to a minimum, and in the end it was determined that the IMF will, instead of contributing funds, assist in monitoring reforms in the country’s banking sector.

With the predicament of Spain at least temporarily resolved, Bloomberg reported Monday that Italy moved back into the spotlight with its more than 2 trillion euros of debt—an amount that frightens investors despite the fact that otherwise, its financial condition is considerably better than that of Spain.

Italy’s jobless rate, 10% in the first quarter, was less than half of Spain's 24% for the period, and its efforts to meet a commitment of bringing its budget deficit within the European Union limit of 3% of GDP are apparently succeeding—its current deficit, at 3.9%, is less than half that of Spain, and it is already running a surplus before interest payments.

But investors fear contagion. “The problem for Italy is that where Spain goes, there’s always the perception that Italy could follow,” Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, said in the report. ’’There is insufficient differentiation within the financial markets. It is clear as the light of day and has been that Spain’s fundamentals are a lot direr than Italy’s. That hasn’t stopped Italy suffering from Spanish contagion.’’

Yields have been rising on Italian bonds even as there are fewer investors willing to buy. And the danger is not just contagion for Italy, but also an increased threat to the euro. Thomas Mayer, an economic adviser to Deutsche Bank, was quoted saying, “If Italy has a problem with accessing the markets because investors lose confidence in the Italian ability to do the right thing, the ECB will be drawn into the fire. That could pose a potentially lethal threat to European monetary union.”

Add to that the situation in Greece and the situation remains dire despite the Spanish rescue. Bloomberg reported Monday that the most recent polls show that Greeks still favor the party pushing for a renegotiation of the country’s latest bailout. On Friday, former Prime Minister George Papandreou said that the government was just “a few weeks” away from exhausting funds.

“This is the point where we have to make the decision,” he was quoted saying in an interview broadcasted Monday on Bloomberg Television. “If we don’t, I believe we have a small window of time—the next few months—and maybe if we have that—before we see a splintering of Europe. So this is a make-or-break period.”

U.K. Chancellor of the Exchequer George Osborne appeared to agree with that assessment, and not just for Greece, in an op-ed in the Sunday Telegraph. He wrote, “We are approaching a moment of truth for the eurozone. After more than two years of uncertainty, instability and slow growth, decisions taken over the next few months could determine the economic future of the whole European continent for the next decade and beyond.”

It looks to be a tight race in Greece, with Syriza, the party in favor of killing current bailout terms, trailing New Democracy, the leading pro-bailout party, by only 0.7%. New Democracy stands at 22.7%, compared with Syriza at 22%. Although Alexis Tsipras, head of Syriza, has said he would keep Greece in the euro even as he rejects the austerity terms of its bailout, that may not be an option should his party win the election.

The country is already suffering under crushing debt that threatens to shut down its power companies. Regulators planned to meet Monday with the country’s power market operator to discuss an emergency loan of 300 million euros aimed at paying for gas imports from Gazprom of Russia, Botas of Turkey and Eni of Italy.

Standard & Poor’s on June 7 characterized Public Power Corp. (PPC), Greece’s largest power company, as on the verge of default. It cut the power company’s rating to the lowest level above default and in its report said, “PPC has almost fully depleted its liquidity, owing to sharply falling earnings, climbing overdue receivables, and the absence of new credit facilities. PPC will likely default on its obligations in the near term.”

Such an eventuality would only add to Greece’s woes, if rolling blackouts should make it impossible to sustain the tourism industry. While Greece gets power from domestically mined coal, if it cannot pay for imported gas it could be subject to blackouts that would deter travel to the country in addition to increasing the woes of Greeks already coping with difficult conditions.

Paris Mantzavras, an energy analyst at HSBC Holdings Plc in Athens, was quoted saying, “If gas supplies are completely cut off, then yes, there is a danger of blackouts. Not major ones, but probably some rolling blackouts. It would be critical for the industry and manufacturing sector, and for tourism too. I would expect the government to do its best to avoid a complete cutoff.”

Should Greece end up departing the eurozone, according to Elias Konofagos, vice president of Athens-based consultant Flow Energy & Environment Operations, the government would likely take control of all oil and gas imports as it worked with limited foreign currency reserves. He said in the report, “For a long period of time they would import a portion of what’s needed, which would lead to rationing, even for gas for cars.”

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